Sterling climbs as political risks ease

LONDON (Reuters) - Sterling closed the week on firmer ground, climbing around half a percent against the dollar on Friday as better-than-expected data on British industry and rising confidence in the progress of Brexit talks supported the currency.

FILE PHOTO - UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

Negotiations aimed at unravelling over four decades of union between Britain and the other European member states restarted this week, promising more clarity about the shape of a future divorce deal and easing some of the political uncertainty that has pressured the pound.

The European Union’s chief negotiator Michel Barnier said the bloc was willing to reach an accord on an orderly Brexit, but expected clarification on three key issues - including the contested divorce bill - within the next two weeks.

Though no concrete steps were taken, no news can be good news for sterling when it comes to Brexit talks, analysts said.

“There wasn’t an outright ‘we have got absolutely nowhere’ (from the negotiators), there was none of that. Instead, we had cautious tones,” said Neil Jones, Mizuho Bank’s head of hedge fund currency sales.

“That’s enough to make sterling go up for now.”

Sterling was up 0.5 percent against the dollar, trading at $1.3209 at 1615 GMT and posting its first week of gains in four.

It was also up against the euro, trading 0.4 percent higher at 88.23 pence.

Strong data on trade and industrial output on Friday also provided a welcome - if modest - boost for the pound.

British industrial output increased in September at the fastest pace this year and well above all forecasts in a Reuters poll of economists, the numbers showed. The goods trade deficit also improved.

“The negative ambience of UK markets reversed this morning as bullish manufacturing and industrial production for September provided welcome relief,” said Alex Lydall, head of dealing at Foenix Partners, a currency risk management consultancy.

“Small steps in the right direction must be celebrated at a time where political dismay and negotiations across the Channel dominate headlines,” he added.

Traders will be monitoring UK inflation, wages, and retail sales data due next week for any changes to Britain’s economic picture which could sway the Bank of England from its current course on interest rates.

The Bank announced plans to hike just two more times in the next three years last week, after raising rates for the first time in over a decade, which sent the pound plummeting as investors pushed back their rate hike expectations.